Why is global economic stability important?

Promoting economic stability is partly a matter of avoiding economic and financial crises. It also means avoiding large swings in economic activity, high inflation, and excessive volatility in exchange rates and financial markets. Instability can increase uncertainty and discourage investment, impede economic growth, and hurt living standards. A dynamic market economy necessarily involves some degree of instability, as well as gradual structural change. The challenge for policymakers is to minimize the instability without reducing the economy’s ability to raise living standards through higher productivity, efficiency, and employment.

Economic and financial stability is both a national and a multilateral concern. As recent experiences in world financial markets have shown, countries have become more interconnected. Problems in one apparently isolated sector can result in problems in other sectors and spillovers across borders. No country is an “island” when it comes to economic and financial stability.

How does the IMF help?

The IMF helps countries to implement sound and appropriate policies through its key functions of surveillance, technical assistance, and lending.

Surveillance: Every country that joins the IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. The IMF is mandated to oversee the international monetary system and monitor the economic and financial policies of its 188 member countries. This process, known as surveillance, takes place at the global, level and in individual countries and regions. The IMF highlights possible risks to domestic and balance of payments stability and advises on needed policy adjustments.

Consulting with member states

The IMF monitors members’ economies through regular—usually annual—consultations with each member country. During these consultations, the IMF staff discuss economic and financial developments and policies with national policymakers, and often with representatives of business, labor unions, and civil society. Consultations consider the impact of fiscal, monetary, financial, and exchange rate policies on the member’s domestic and balance of payments stability, as well as on global stability, and assess risks and vulnerabilities. The IMF offers advice on policies to promote each country’s macro-financial and balance of payments stability, drawing on experience across its membership.
The policy framework for these consultations is set in the Integrated Surveillance Decision. These consultations are also informed by membership-wide initiatives, including:

• work to systematically assess countries' vulnerabilities to crises;
• the Financial Sector Assessment Program (FSAP). In collaboration with the World Bank, the FSAP assesses countries’ financial sectors and helps formulate policy responses to risks and vulnerabilities; and
• the Standards and Codes Initiative. Also in collaboration with the World Bank, the initiative assesses countries’ observance of a dozen internationally recognized standards and codes of good practice to support the design and implementation of related policies.

Overseeing the bigger world picture

The IMF also closely monitors global and regional trends.

The IMF’s periodic reports on the World Economic Outlook, its regional reports, the Fiscal Monitor, and the Global Financial Stability Report analyze global and regional macroeconomic and financial developments. The IMF is well positioned to facilitate multilateral discussions on issues of relevance or common concern to groups of members, and in the process, advance shared understanding on policies to promote stability. In this context, the Fund has been working with the G-20 to assess the consistency of those countries’ policy frameworks with balanced and sustained growth for the global economy. 

The Fund has reviewed its surveillance mandate in light of the global crisis. It has introduced a number of reforms to improve financial sector surveillance within member countries and across borders, improve understanding of interlinkages between macroeconomic and financial developments (including through the Spillover Reports), and promote greater debate on these matters. These reforms, along with those being implemented following the 2011 Triennial Surveillance Review, will go a long way to address the concerns raised in the 2011 report by the Independent Evaluation Office.

Data: In response to the financial crisis, the IMF is working with members, the Financial Stability Board, and other organizations to fill data gaps important for global stability.

Technical assistance: The IMF helps countries strengthen their capacity to design and implement sound economic policies. It provides advice and training on a range of issues within its mandate, including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics systems; and legal frameworks.

Lending: Even the best economic policies cannot completely eradicate instability or avert crises. In the event that a member country does experience financing difficulties, the IMF can provide financial assistance to support policy programs that will correct underlying macroeconomic problems, limit disruption to the domestic and global economies, and help restore confidence, stability, and growth. IMF financing instruments can also support crisis prevention.